Shock then stress, now synchronicity

What were you doing thirty to sixty days ago? Well, according to the Bureau of Economic Analysis during the month of May the increasingly mythical “average American” was making just little bit more and so consuming a bit more goods and services that in aggregate cost a tiny bit less and even saving itty-bitty more than in most recent months. (Bit = a fragment, a morsel, a small bite.) Bloomberg reported, “The so-called core personal consumption expenditures price index, which strips out volatile food and energy items, increased 0.1% from the prior month. That marked the smallest advance in six months. On an unrounded basis, it was up just 0.08%, the least since November 2020.”

Many use Personal Consumption Expenditure to measure inflation. I find the inflation-adjusted “Real PCE” estimate my best-available signal of existing effectual demand. The first chart below shows Real PCE with its goods and services components. The May 2024 Real PCE was about 12 percent more than the May 2019 Real PCE. This is consistent with the May 2014-May 2019 increase in Real PCE. So, I perceive robust demand. This kind of growth is a healthy foundation for supply chains. The second chart below is Real PCE for Food-At-Home. Demand for groceries is still above pre-pandemic trends, but has fallen considerably from a steep peak three years ago. Upstream and midstream players have been able to adapt to the demand levels of the last two years.

Four years ago demand suddenly collapsed for most goods and services, even as it surged for a few others (e.g., Food-At-Home). This supply chain shock set the stage for two years of significant systemic stress and ongoing volatility. Healthy supply chains are seldom “stable”, but current direction, speed, and magnitude is much more conducive to confidently fulfilling demand than anytime between March 2020 and late 2021.